There were two recurring MiFID II issues discussed at TradeTech Liquidity (24th Nov):
- the new OTF category does not fit the riskless principal/dual capacity model used by firms facilitating agency client order execution on existing broker crossing systems – business models will all have to change!
According to Kay Swinburne the number 1 issue for the Rapporteur, for the review of MiFID, is whether the new OTF category of venue is necessary.
Currently, under MiFID, trading venues or platforms are classed as Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) or Systematic Internalisers (SIs). A new broad definition is heralded that will apply regulation to all organised trading outside of the current set of venue types – Organised Trading Facility (OTF). Broker dark pools and crossing systems are expected to fall into this category.
On OTFs, Valerie Ledure from the European Commission said that an operator can trade on own account as an SI and as a separate entity can operate an OTF…The existing regime can accommodate existing platforms but not for derivatives – we needed a comparable regime to the US to guard against regulatory arbitrage. ESMA has no official line on this issue yet but is discussing it.
General feedback was that MiFID II will lead to more venues, more fragmentation, more confusion, more client repapering.
Buy-sides don’t want more venues.
The FSA wants sensible transparency around how people trade, not regulation to change the way people trade. A phased approach is preferred – not a rush.
- the proposed obligations for all algos to provide liquidity throughout the trading day are unfeasible!
From panel discussions – market participants and the FSA – no one agreed with the proposed regulation in MiFID II Article 17.3 – “An algorithmic trading strategy shall be in continuous operation during the trading hours of the trading venue to which it sends orders or through the systems of which it executes transactions. The trading parameters or limits of an algorithmic trading strategy shall ensure that the strategy posts firm quotes at competitive prices with the result of providing liquidity on a regular and ongoing basis to these trading venues at all times, regardless of prevailing market conditions.”
Other key points I took from the day:
Timeline for MiFID II was described by Kay Swinburne as (at best) Level 1 agreement of the current proposed text, in parallel with MAD, by the end of 2012.
There is an EP questionnaire out now with a closing date of 13th Jan.
A working document is expected in February 2012, there will be further debate in March, with an ECON vote in July.
ESMA will then develop the technical standards (Level 2) during 2012 and 2013
So we are looking at an implementation date somewhere in 2014 at the earliest.
ESMA is also looking at what can be done now (before MiFID II) – a report is due out in January 2012.
Data standards were mentioned – …to facilitate a European Consolidated Tape, data is required in a form that everyone can use – Data standards are required now rather than wait for MiFID II.
On HFT – speakers were all in favour of HFT – Manoj Narang spoke about the misconception that HFT causes high volatility. Price volatility since 2007 has increased by 65% during the period between market close and the open of the next trading session – no trading takes place so why blame HFT? During trading hours over the same sample there has been a 12% increase; conclusion being that trading dampens volatility.
Surveillance systems at venues should guard against predatory situations – no need for heavy handed regulation. Indeed algos can be a target for manipulation rather than the cause. 90% of HFT is market making. Most HFT volume is passive, regulation is needed on aggressive flow. Getco also made their case in favour of HFT.
Buyside – more focus will be on multi-asset co-relation, they will look to their broker to provide this data. Some will want to use their own SOR and not rely on brokers – core broking is declining and specialist broker is growing along with independent research. The regulators should focus on fixing issues with post-trade transparency of today’s data rather than change anything else yet.
TCA – The Buy-sides want much more detail on what their Sell-side is doing and wants to stay in control of their orders. They want real-time independent TCA to measure broker performance.
Buy-side will link to a logical liquidity hub (with access to TCA products and tools) linking to brokers, algos, dark pools and venues. Requires partnership relationships to get more data.
Need enough volume and data-set to effectively build TCA; and a variety of tools and sources to make sense of venue analysis – must be continuously updated to be useful with real-time multiple sources for pre-trade and for TCA.
Closing statement from Kay Swinburne: MiFID II should be a priority for every financial firm.